October 13 0 241

The Interview with the Top Manager at Semrush: How the SEO service Entered IPO and Managed to Achieve Income of $125 Million a Year

Semrush is one of the most well-known platforms for managing brand visibility on the Internet. As of now, the service is trusted by 7 million marketers all over the globe. In 2008, Semrush was launched by two friends from St. Petersburg, Dmitry Melnikov and Oleg Shchegolev.

In 2021, the company conducted an IPO on the New York Stock Exchange and within a month it raised investments totaling $140 million. In late March, Semrush shares were trading at $14, as of early September, their value exceeded $28. At that, the company’s Market Cap rose beyond $3 billion.

Semrush has been in the market for 13 years; however, with annual revenues of $125 million, the net loss is $7 million. How is it possible? Eugene Levin will share with us the details.

Eugene is Chief Strategy and Corporate Development Officer at Semrush. Eugene has been with the company for five years. Previously, he was a partner at the venture capital fund Target Global, and before that he was a co-founder at the game development company AggroStudios.

How was Semrush founded and how did it grow into an international business? What were founders occupied with before that? What projects did they run?

Semrush started out as a hobby. The company’s founders are Oleg Shchegolev and Dmitry Melnikov. Initially, Oleg and Dmitry, two childhood friends, ran small marketing projects together while gaining experience in team management, marketing, and so on. At some point, they decided to stop working on multiple projects at the same time and came to a decision to focus on Semrush.

As a result of hard work, the product turned out to be more advanced than the offers available on the market. After the product had been demonstrated to friends and acquaintances, Oleg and Dmitry got busy with the product’s further development and elaboration. In 2012, it became apparent that the key market and the main audience for the software are located in Western Europe and the US. The company opened its first office in the US (Philadelphia), and later in the Czech Republic and in Cyprus. Since 2018, the company has been headquartered in Boston.

The product has also evolved. The instruments for allied fields were added: online visibility, SEO, digital PR, content marketing, SMM, and so on. In short, it was the product that led us to success because it was streets ahead of all existing products. Instead of so-called point solutions, we have become a multifunctional platform. We also owe our success to all company employees. Together we dreamed and burned with enthusiasm; we were (and still) supported by our huge community. Clients shared feedback freely and recommended our product to friends and colleagues.

What played the key role in such vigorous growth of the service? Was it the decision to field the Western market, a freemium model, or investments?

Now and again, the quality. Additionally, our product has been helping to solve contemporary market problems that are growing in numbers year by year.

As for Western markets, in my opinion, there are no other markets for software. The income breakdown for typical SaaS companies that deploy classic SaaS models looks as follows: North America — 50%, Europe — 30%, all other regions — 20%. Probably, there are opportunities in China, yet still, there is "other internet" and, accordingly, different marketing.

Practically, there is no choice. The Russian market is good for consumer products but it is pointless in terms of B2B and SaaS products. In my estimation, the Russian market represents at its best 2% of the global SaaS. There are local successes; however, even leading companies are still relatively small compared to world leaders in the respective industries. For instance, 1С is a large company, but it can’t be compared to Workday or the accounting system Intuit.

How do you promote your service to retain existing subscribers and gain new ones?

The marketing department does its job. You can find numerous articles and interviews with our marketing experts on this topic. In general, we deploy marketing campaigns using all existing promotion channels.

During the pandemic, many companies went online, however, the growth rate of the number of your subscribers declined. What is the reason?

It is worth noting that there was no online growth at the very beginning of the pandemic.

Everyone panicked, many businesses tried to cut down expenses while customers quit subscriptions. Yet still, if you look at our customer base growth from Q3 2020 until Q1 2021, you notice the growth compared to previous data. For example, in Q1 2021, there was a record increase in the number of paying users. As soon as the world shifted online, the number of our subscribers began growing faster.

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The company does not yield a profit — in 2020, the company received $125 million in earnings but the net loss approached $7 million. What do you spend money on?

Traditionally, we invest in further business development. We work in the fast-evolving market where this strategy is considered more efficient, and the profit optimization begins later. In terms of business profitability and long-term prospects, it is reasonable to size up other indicators. For example, the gross profit margin indicator is within the required range for our company.

Besides, not everyone in Russia is familiar with the GAAP reporting format — to understand the business profitability you need to look at the cash flow statement and free cash flow indicators. On the whole, to draw conclusions from my statement about GAAP you need to understand how it works. You need to know what Stock-based compensation is (it affects profitability) and understand how Revenue recognition works.

How would you explain in simple terms the main articles of expenditure of $132 million to a person without economic education?

Our PNL looks the same as the PNL of an average SaaS company at this stage. It is clear from the reporting. It contains the breakdown into COR, S&M, R&D, and G&A.

Simply put, these include sales and marketing costs (around 40%), R&D and development costs (13-14%), general administrative costs (23%), and cost of revenue (20-23%).

Your primary market is the US.  What are the shares of the most important for you GEOs?

Our top markets are the US, Canada, Europe, Asia, Australia, and some regions in Latin America.

Russia isn’t in the top 10, is it?

No, it is not. The Russian market is too small for us — we do not sell out products in Russia directly, only through local resellers.

In March 2021, you held an IPO on the New York Stock Exchange, but instead of the expected 17 million shares you managed to sell only 10 million; moreover, at the beginning of trading, the share price fell by 20%. What was the reason?

There was a very intense pipeline. Concurrently with us, within the same month, so many companies entered IPO. It was one of the busiest periods in the entire modern history of the stock markets. Investors did not have enough time to give consideration to every IPO. It was a common issue for all businesses that came out at the same time with us.

It is well recognized that entering an IPO is not easy. Can you tell on the example of your company how complicated the process was and whether financial and time investments were justified?

This is a time-consuming and effortful process. First of all, a complete revision of the approach to the Leadership team is required. This includes hiring highly qualified high-priced specialists — this is a necessary step to enter the IPO. Secondly, there are many processes that are designed to secure shareholders — all sorts of policies and/or processes. All that restricts business actions and sometimes slows down decision-making.

In terms of operating costs, it is very costly to be a public company. Insurance and software, all this is also very expensive. Besides, there are additional costs of being a public company. At what point do pros prevail over cons? Every company decides for itself. For example, there is a delta in the estimation of a public and a private company, the Discount for Lack of Liquidity (usually private is valued lower than public).

As for the advantages of a public company, I would mention access to capital, liquidity for shareholders, extra motivation for employees, and the possibility to issue shares to acquire another company.

 

It is clear that it is complicated to be a public company but there are pros that you’ve mentioned. What does a step-by-step process of entering an IPO include?

Preparation takes from 18 to 24 months, but many things should be done earlier. Every company has its own unique way, there is no single algorithm.

The first 12 months are usually required for implementing systems and working with the team. At this stage, you hire specialists with work experience in public companies; implement ERP and FP&A systems and processes to ensure SOX compliance. At this stage, you also select auditors and lawyers, and then, begin attracting independent members of the board of directors.

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Around 12 months prior to the IPO you begin working with investment banks and work out an investment proposition and positioning.

Around 7-8 months prior to the IPO, the company issues an RFP and selects what banks will participate and what role they will play. For example, the company decides on the main book runner. Next, there is work on the S-1. When the document is ready, it is submitted to the SEC. As a rule, there are several iterations of edits and adjustments based on comments. At the same time, Non-Deal Roadshow meetings with investors are held. Underwriters’ lawyers conduct the Due Diligence. Once the SEC approves the S-1, the company can start the Roadshow.

Roadshow, in its turn, takes about two weeks. During this period, the company’s representatives meet with investors. Our Roadshows were held during the pandemic, so all meetings were via Zoom; on average, we had 8-10 meetings a day.

As a result, the final decision on the share price and IPO size is based on the inflow of orders from investors.

That done, the stock trade begins and the company becomes a public entity.

Unlike many other IT companies, there are no thousands of competitors in your market, only a few companies, including well-known Ahrefs, Serpstat, and Similarweb. What are the market shares of your company and your competitors? What differs you from competitors?

Indeed, we do not have many direct competitors; and in terms of the scale of outreach, there are none. Or else I do not know about them. As far as I know from the available information, these companies have narrower offers, and they are smaller in terms of user base and income.

However, if you look at each of our tools or solutions, the competition is high — 4 or 5 brands for every specific tool. In this scenario, every customer faces a dilemma, whether to buy tools separately or all together in one place. Our advantage is that our products are integrated, it is convenient. With all other factors being equal, clients choose our products.  Given the situation, it is difficult to evaluate the market share for each of our instruments or solutions. We estimate the total market at $13 billion and our share is slightly over 1%.

What do you think of your competitors on the whole?

Competition is important. It helps the market and us to evolve while clients can get the best offer. We try to maintain relations with all companies in our industry; of course, partially we compete and partially we collaborate.

For example, we are in competition with Majestic and its backlink-product base. However, we provide integration so that people can carry out an audit using both bases. The same situation was with Agency Analytics — we entered into a collaboration. We always support solutions that suit the end-user. We see ourselves as market players that create an ecosystem where there is space for other companies.

What are your future plans that might be interesting for users?

Recently, under the Sellzone brand, we have launched products for Amazon sellers. We also have the App Center for submitting third-party applications to us.

We develop all these areas avidly; this helps us understand what we are going to do in the future.

 

How do you manage to acquire new businesses and create new products with a negative net income? Where do money and resources come from?

The company may not show positive net income but generate a positive cash flow at the same time.

For instance, if a client buys an annual subscription, he pays the total amount at once. The company has these funds in its account and can invest them in business development. But according to GAAP, only the one-month subscription amount can be recognized as income.

As a result, the recognized income can be lower than the volume of money that the company receives.

Additionally, companies attract investments. For example, we had several rounds of venture capital investments, and significant capital was attracted during the IPO.

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